Where does George Osborne’s ‘baseball-bat’ Budget leave Logica, the European IT outsourcer and systems integrator? Better off than you might think. Britain’s public sector is Logica’s biggest customer, but the government still only represents 13% of group sales. And none of its big-ticket technology projects are up for renewal in 2010, giving good earnings visibility. What’s more, Logica has little exposure to the defunct national ID card and biometric passport schemes that have caused such a headache for its rivals.
Yes, order flow is bound to slow as deals take longer to close. Yet if governments across Europe are serious about cutting deficits, they’ll need help with cutting costs and improving productivity. For example, Logica has already web-enabled the tax return and car-tax procedures in Britain, thus lowering overheads. It is also in talks with the Con-Lib coalition about providing outsourced services across a range of departments.
So what about the private-sector side of its business, which makes up 68% of revenues? Again, Logica isn’t unduly exposed to any single market or contract. Given growth in corporate IT budgets in recent years has been minimal, IT sector profits are unlikely to plummet, as they did after the dotcom bubble. This time round, there isn’t the same level of excess IT fat to be trimmed. One-off software purchases can always be delayed, but vendors who can provide clients with quality as well as cost savings should still do well.
Logica (LSE: LOG), rated a BUY by Panmure Gordon
With all the new regulations coming down the pipeline in, for example, the finance sector, Logica should see decent growth. The group’s outsourcing unit is still growing at double-digit rates and accounts for 37% of revenues.
In May, Logica said its top line would fall “modestly” in the first half, but recover in the second, leaving it flat for 2010 as a whole, with operating margins (EBITA) of around 7.4%. The City expects turnover and underlying earnings per share (EPS) of £3.7bn and 12.2p, rising to £3.8bn and 13.2p by 2011. That puts the shares on p/e ratios of 9.0 and 8.3, paying a 2.9% dividend yield.
I’d value the group on an enterprise value to EBITA multiple of ten. After deducting net debt of £330m and a pension deficit of £84m, that gives a fair value of 145p per share. There are the usual risks associated with managing large-scale contracts, plus foreign currency exposure. But Logica seems well underpinned here and could even be a possible takeover candidate. Panmure Gordon has a 160p price target. First-half results are due out on 6 August.
Recommendation: BUY at 110p